Cabot Options Institute Earnings Trader – Alert (SBUX)
Starbucks (SBUX)
As discussed in our weekly issue, and on our weekly call, I will be taking a position in Starbucks (SBUX) today. SBUX is due to announce earnings after the closing bell today (February 2). The stock is currently trading for 110.83.
IV Rank: 30.9
Expected Move for the February 10, 2023, Expiration Cycle: 104 to 116
Knowing the expected range, I want to place the short call strike and short put strike of my iron condor outside of the expected range, in this case outside of 104 to 116.
If we look at the call side of SBUX for the February 10, 2023, expiration, we can see that selling the 120 call strike offers an 88.73% probability of success. The 120 call strike sits just above the expected move, or 116. We can define our risk by buying the 125 call, thereby creating a five-strike-wide bear call spread at the 120/125 call strikes.
Now let us move to the put side. Same process as the call side. But now we want to find a suitable strike below the low side of our expected move, or 104. The 100 put, with an 86.41% probability of success, works. Staying with a five-strike-wide spread we can buy the 95 put to define our risk and create a bull put spread at the 100/95 strikes.
We can create a trade with a nice probability of success if SBUX stays within the 20-point range, or between the 120 call strike and the 100 put strike. Our probability of success on the trade is 88.73% on the upside and 86.41% on the downside.
Moreover, we have an 8.3% cushion to the upside and a 9.8% margin of error to the downside…
Courtesy of Slope of Hope
Here is the trade:
Simultaneously:
Sell to open SBUX February 10, 2023, 120 calls
Buy to open SBUX February 10, 2023, 125 calls
Sell to open SBUX February 10, 2023, 100 puts
Buy to open SBUX February 10, 2023, 95 puts for roughly $0.62 or $62 per iron condor
Our margin requirement would be $438 per iron condor. Again, the goal of selling the SBUX iron condor is to have the underlying stock stay below the 120 call strike and above the 100 put strike immediately after SBUX earnings are announced.
Here are the parameters for this trade:
- The probability of success – 88.73% (call side) and 86.41% (put side)
- The maximum return on the trade is the credit of $0.62, or $62 per iron condor
- Max return: 14.2%
- Break-even level: 120.62 – 99.38
